Digitalisation: Seizing opportunities and managing risks

Speech by Fausto Parente at the AMICE Congress

Delivered virtually, 2 June 2021.

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Introduction

Thank you for inviting me to talk to you today for this AMICE Congress.

Like many of you, I would have preferred that we were meeting in person, but online conferences are now very much part of the new normal.

This is a transformation that we have all made over this past year – and one that represents well the theme for this event: the art of transformation.

In fact, for me, probably the greatest transformation that we have seen over the past year is the acceleration of digitalisation.

It has affected us all.

Since the very first lockdown, people have relied on technology to get them through their day. From chatting to friends and family to ordering shopping, even the most reluctant consumers have embraced the online world available at the touch of a smartphone button. 

And of course, financial services are no exception. 

Smartphone applications and robo-advice solutions enabling 24/7 access from everywhere, contactless payment cards or smart watches for payments.  Mobile banking, crowdfunding, peer-to-peer lending and insurance solutions, and insurers who will accept smartphone films from policyholders as a way of supporting claims. These are just some examples of how people are going digital.

And so while the impact of the Coronavirus may not yet be clear, one thing is certain: There is growing appetite and acceptance for digitalisation.

And this is what I would like to talk to you about today: How data and digitalisation are transforming the insurance sector and how we – at EIOPA – see our role in supervising this transformation, so that we can ensure that risks and opportunities are balanced, and that – no matter what – consumers remain protected.

Big Data: Transforming the entire insurance value chain

There is no doubt about it, technology is transforming the entire insurance value chain.
And the technology that we see today – artificial intelligence, machine learning, blockchain – is powered by data. 
In the old days, they used to say ‘knowledge is power’. Today, it’s more likely to be ‘data is power’.

In the world of insurance products, policies and pricing are all powered by data. 

Data processing has always been at the very core of the insurance business, informing pricing and products. Underwriting is driven by data-led statistical analysis. 

Today, traditional data sources – like demographic data – are increasingly combined with new sources, such as online or telematics data that provide greater insight into a person’s behaviour and lifestyle.

Take car insurance as an example.

In the past, car insurance premiums were largely determined by demographic, geography and claims history.

Today, car telematics offer customers all sorts of benefits.  Like premium discounts based on driving habits, preventive push-notifications or alerts in case of bad weather conditions, or road assistance in case of accident or car theft of the vehicle. 

And the amount of available data is growing.

According to the European Commission, the volume of data produced in the world is expected to grow  from 33 zettabytes in 2018 to 175 zettabytes in 2025. Essentially, it will multiply by 5 during this time. 

This has a direct impact on the insurance sector.

We also have more powerful algorithms and data storage capacity.

The increasing availability of data is combined with the greater computing power, data processing and cloud computing storing capacity all makes for more effective use of artificial intelligence and machine learning.

Based on the research for our Big Data Analytics thematic review (data collected in 2018), we found that 31% of participating European insurance undertakings were using machine learning and another 24% were at a proof of concept stage. Today, in some jurisdictions the level of adoption in the insurance industry is already 100%, higher even than in the banking sector.

The thematic review also showed that the use of machine learning is being used to improve product design and develop processes for more accurate underwriting techniques, as well as more efficient claims management and fraud detection procedures.

Let’s add to this the concept of open insurance. If we share insurance-related data with other insurance or non-insurance operators, how could this foster innovation in products and services? What will this mean for policyholders?

Gathering data, analysing data, sharing data – these all bring positive outcomes for insurance companies and for consumers. 

Digital innovation helps reduce operational costs, frictions and bottle necks in the production and delivery of insurance products and services. It increases efficiency and competition in the markets, and broadens access to financial services.

hanks to innovation, consumers can also benefit from a wider range and increasingly tailored insurance products and services.

Managing the risks of digitalisation

But we cannot overlook the risks associated with the digital agenda - digital inequality, exclusion and cyber risk.

The benefits of better pricing and personalisation are usually driven by data. This is what makes consumers so ready to share their data. And it should be a win-win for provider and policyholder.

But let’s go back to the car insurance example for a moment.

What happens if a bias has crept in – say against gender or demographic – when training the  machine learning algorithm. This might mean that the consumer is now the victim of unwitting discrimination.

So we need to make sure that data is valued. 

Because what happens when data is not used ethically?  When people find themselves excluded from insurance? Or when the holders of the data do not act responsibly?

At EIOPA, we believe that data needs to be respected. It must be used fairly and organisations holding data must act responsibly.

Because of this, we established a consultative expert group on digital ethics in insurance to look at the use of artificial intelligence in insurance from an ethics perspective. 

Later this month, we will publish the findings from the group and at EIOPA, we will look closely at the group’s findings to consider the role that supervisors can play in this area.

The findings will set out governance principles for the ethical and trustworthy use of artificial intelligence in the European insurance sector. These principles will cover aspects such as fairness and non-discrimination, transparency and explainability, and overall governance, including accountability, security and resilience.

Security of data is perhaps one of the most important thing here.

Especially as companies become more at risk of cyber attacks.

So cyber resilience is essential for any organisation and an effective cyber insurance market is a core component of a sound cyber resilience framework.

A sound cyber insurance market is an enabler of the digital economy.

From raising awareness of the risks and losses that can result from cyber attacks to facilitating responses and recovery, a well-developed cyber insurance market can play a valuable role in risk management.

And the European cyber insurance market is growing rapidly. This is in part due to the overall increase in written contracts offered by insurers, and also because of the growing number of insurers providing cyber insurance.

We expect the market to continue to grow. The increasing frequency of cyber attacks, coupled with stricter regulation regarding cyber security as well as continued technological developments are all expected to increase demand for cyber insurance in the near future.

The Digital Operational Resilience Act – or DORA – will also help to ensure that financial systems and financial service providers have the necessary safeguards in place to protect against cyber attacks and other threats.

At EIOPA, we – as well our sister European Supervisory Authorities – are in firm agreement with the main principles of DORA, in particular as it will help to close the gap in terms of oversight of critical third party providers. After all, digitalisation means outsourcing and cloud, and it is essential that the use of these technologies by insurers is appropriately captured in regulatory requirements.

But we also believe that there is scope for more streamlined and effective governance, as well as a more proportionate approach.

Supervision in the digital age

This brings me to the topic of how we supervise digitalisation and innovation.

Because a well-supervised industry is a driver of consumer confidence and a strong sector.

As supervisors, we need to find the right balance between enabling technology that delivers for consumers and safeguarding consumer protection and financial stability. 

First, we need to make sure that the regulatory framework facilitates digital innovation. This means making sure not only that insurance regulation is fit for purpose, but also removing the legislative barriers to financial innovation without undermining the integrity of the insurance market and consumer protection.

Second, as supervisors we also need to see how we can use technology to facilitate our own work. 

We recently defined a supervisory technology strategy to promote the use of technology by supervisors to support a more effective, flexible and responsive supervisory system. 

As part of this strategy, EIOPA will promote the use of technology by supervisors to deliver innovative and efficient solutions through knowledge sharing and promoting a culture of innovation and initiative between supervisors. 

This will help supervisors adapt to the new reality that digital transformation is bringing.

In conclusion

In conclusion, let me say: it’s clear that the future is digital. 

And, as insurers, as supervisors, we have to keep up.

This means being ready to harness the opportunity that digitalisation brings, but also being able to check its progress – if and when we need to – so that we ensure consumer protection.

Because, for me, consumers outcomes must always come first.

This is the challenge for supervisors: to create an environment that empowers both innovators and consumers. 

Our success will depend on our ability to offer practical solutions that help create the right environment for financial innovators to succeed and the right environment for consumers to benefit.

But our success will result in a stronger insurance sector that delivers for the people in new ways, with new and better products.

And that makes the challenge of transformation worth it.

Thank you.